Brown Printing Co. v. Commissioner of Internal Rev., 16982.

• Decision Date: 16 May 1958
• Docket Number: No. 16982.,16982.
• Citation: 255 F.2d 436
• Parties: BROWN PRINTING COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

255 F.2d 436 (1958)

BROWN PRINTING COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 16982.

United States Court of Appeals Fifth Circuit.

May 16, 1958.

COPYRIGHT MATERIAL OMITTED

William S. Duke, Jack Crenshaw, Montgomery, Ala., for petitioner.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Atty., I. Henry Kutz, Atty., Marvin W. Weinstein, Atty., Morton K. Rothschild, Atty., Nelson P. Rose, Chief Counsel, Int. Rev. Ser., Rollin H. Transue, Sp. Atty., Washington, D. C., for respondent.

Before TUTTLE, BROWN and WISDOM, Circuit Judges.

TUTTLE, Circuit Judge.

This petition for review of a decision of the Tax Court challenges the disallowance of part of the sums deducted by the taxpayer as rent paid to a trustee landlord under a lease executed between the parties who admittedly did not deal at arm's length.

The lease in question was entered into in 1949, as a ten year extension of the original four year lease made in 1945 to run from May 1, 1945. The stock of petitioner was owned by trustees who also owned the building in question. Taxpayer states in its brief: "Petitioner has always admitted that these two parties could not deal at arm's length in the making of the lease." The lease provided for payment of a minimum monthly rent of $400 towards 4% of gross receipts. For the years 1952 and 1953, the two tax years in question, petitioner deducted as rent $22,401.62 and $15,814.65 respectively. The Commissioner disallowed all amounts over $10,609.03 per year. The Tax Court raised this figure to $12,325, which it found to be a reasonable rent for the years in question.

The applicable statute is Section 23(a) (1) (A) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 23(a) (1) (A):

"§ 23. Deductions from gross income. In computing net income there shall be allowed as deductions:

As amended by Sec. 121(a), Revenue Act of 1942, c. 619, 56 Stat. 798

"(a) Expenses.

"(1) Trade or business expenses.

"(A) In general. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity."

We have held that "rentals or other payments for the use of property which are excessive in amount, taking into consideration all the facts of the particular case, do not constitute ordinary and necessary business expenses, or payments required to be made as a condition to the continued use of the property." Limericks, Inc., v. Commissioner, 5 Cir., 165 F.2d 483, 484. See also Hightower v. Commissioner, 5 Cir., 187 F.2d 535.

It is entirely appropriate, therefore, for the Commissioner to inquire into payments in the nature of rent and disallow such part as may be excessive in amount, and if such determination of disallowance is soundly based, his action carries with it a presumption of correctness. Furthermore, while the actual contract made between parties dealing fully at arm's length is usually persuasive of its reasonableness, no such inference can arise from the execution of a contract between persons having an interest on both sides of a transaction.

Here, recognizing as they did, the vulnerability of a rental figure from the standpoint of deductibility, that would not in fact be fair, the parties undertook to obtain expert real estate advice on this point. The real estate department of the First National Bank suggested the rental of 4% of gross receipts, with a $4800 annual minimum. The persons who suggested this figure were not called as witnesses, and the record does not show what factors they considered in making this suggestion.

The record does not disclose what the annual receipts of petitioner were in 1944 and prior years, and thus it is impossible to ascertain what annual rent they might have expected would result from a 4% lease. It is shown that in 1945, the year before the lease was first executed, but which became the first year of the term 4% produced rent of $7,000; in 1948, the last year of the original lease, the rent came to $15,400; this was the last year's experience when in 1949 the term was extended for an additional 10 years.

Petitioner's witnesses testified that, viewed as of the time that the lease was made, it was a reasonable lease, pointing out, among other things, that if it produced a big return in a year...